Simply Chocolate Company is considering two possible expansion plans.Proposal X involves opening five stores in North...
Simply Chocolate Company is considering two possible expansion plans.Proposal X involves opening five stores in North Carolina at a cost of $2,400,000. Under Proposal Y, the company would focus on Virginia and open six stores at a cost of $3,000,000. The following information is given for the two proposals:
Proposal X Proposal Y
Required investment $2,400,000 $3,000,000
Estimated life 10 years 10 years
Estimated residual value $200,000 $200,000
Estimated annual net cash flows $450,000 $580,000
Required rate of return 14% 14%
Based on the above following problem,
Required: for each proposal, you are asked to calculate
a.Pay back Period
b.Accounting Rate of Return
c.Net Present Value
d.Profitability Index
3.Indicate which proposal is the better investment.
Homework Answers
a. Payback period for Proposal X= 2400000/450000=5.33 year and for proposal Y=3000000/580000= 5.17 year
b. Accounting rate of return for X=450000/2400000=18.75% and for Y= 580000/3000000=19.33%
c.
For Proposal X present value of annual net cash flow=$2347252.04.Calculation given below:
So, NPV=-2400000+2347252.04+200000/1.14^10=$1200.80
For proposal Y present value of annual net cash flow=$3025347.07 Calculation given below:
![A B D F rate PMT 14% 14% rate 580000 PMT 580000 nper PV 10 10 nper |=PV(E1,E3,E2) ($3,025,347.07) PV PV(rate, nper, pmt, [fv]](http://img.homeworklib.com/images/168c81c0-8494-4143-910e-8c7131556e41.png?x-oss-process=image/resize,w_560)
So, NPV for proposal Y= 3025347.07-3000000+200000/1.14^10=$79295.83
d. Profitability index for X= (NPV+Initial investment)/initial investment=(1200.80+2400000)/2400000=1.0005
Similarly PI for Y= (79295.83+3000000)/3000000= 1.026
As PI for proposal Y is more than X, so proposal Y should be chosen.
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